Recent analysis on hedge fund positioning indicates that funds across most strategies are betting on 10-year Treasury yields. The only exception to this, according to Bank of America Merrill Lynch analysts, are funds with a short bias, merger arbitrage and market neutral funds. Has this been a good bet? Strong manufacturing and construction data helped to restore some investor confidence in equities, and as a result, US treasury prices fell on Tuesday, bringing yields to a 2-week high.
U.S. 10-Year Treasury Note
U.S. 30-Year Treasury Bond
Hedge fund positioning in futures
Analysts Jue Xiong and Stephen Suttmeier said in their Feb. 26 “Futures and HF Positioning Report” that last week’s data from the Commodity Futures Trading Commission indicates that asset managers snapped up $2.9 billion worth of S&P 500 futures and $400 million worth of NASDAQ 100 futures.
They also purchased $800 million worth of futures for the Russell 2000. Despite these purchases, they said asset manager and hedge fund positioning in U.S. equities is still close to a three-year low.
Looking at hedge funds by type, they said Leveraged Funds bought $1.5 billion in S&P 500 futures and $200 million in futures for the NASDAQ 100. However, they sold $1.3 billion worth of Russell 2000 futures. Leveraged funds’ net positioning for the NASDAQ 100 is also still close to a three-year low.
Asset managers dump 30-year Treasuries, gobble up 2-year
The BAML team found aggressive sales of 30-year Treasury futures last week at $6.3 billion. Asset managers also sold $16.7 billion worth of futures for 10-year Treasuries but purchased $400 million in 2-year Treasury futures.
Asset manager and hedge fund positioning on a net basis reached a new three-year high, they also found.
Leveraged Funds ran in the opposite direction of the overall net position, aggressively gobbling up $2.2 billion in 30-year Treasury futures, $15.5 billion in 10-year Treasury futures and $3 billion in 2-year Treasury futures. According to Xiong and Suttmeier, the flow of Leveraged Funds into Treasury futures of all three durations suggest that that a reversal of the rising bet on 10-year yields is imminent.
Hedge Fund positioning according to top strategies
The analysts also highlighted hedge fund positioning for the major strategies as Market Neutral funds cut their market exposure from 7% net long to 6% net long.
Equity Long/ Short funds held their market exposure steady at 36% net long.
Macro funds kept covering their S&P 500, NASDAQ 100, Commodities and 10-year Treasury shorts and maintained their long positioning toward emerging markets while cutting their long position in the U.S. dollar.